Are Your Clients Subject To Massive Estate Taxes Without Knowing It?

Estate taxes are a very interesting topic to discuss, even if, in reality, they don’t affect that many people. Most people might even say that having to worry about federal estate taxes is a good problem to have because it means they’re a millionaire five-times over.

However, when factoring in every aspect of an estate, it’s not out of the realm of possibility to exceed the exemption threshold without realizing it. And if they live in a state that has its own estate taxes, often with thresholds well below the federal limit, the pain gets a lot more real.

How Does It Add Up?

As a financial professional, you’re aware of some of your clients’ assets, be it investment or retirement accounts you manage. What about the rest?

Property Ownership: Do they own their home? Do they own multiple homes? Do they have other rental properties?

Bank Accounts: Apart from the ones you’re aware of, perhaps used to draw money for investments, how many other accounts do they have?

Vehicles: How many cars do they have? Are they leased or owned? Are there any other vehicles — boats, RV, aircraft, motorcycles — that would be factored into their estate?

Life Insurance Coverage: Do you know if your client has a stand-alone Life Insurance and how much it’s worth? Are they aware that the proceeds from a policy count towards their estate? A multi-million dollar policy can put them dangerously close to the threshold. Is it in an Irrevocable Life Insurance Trust (ILIT) to shield the beneficiaries from estate taxes?

Valuables: Unless you’ve been to a client’s home, would you know the value of their artwork, antique furniture or rugs, memorabilia collection, and jewelery either purchased or passed down through generations? What about the contents of a safe deposit box?

Business Interests: Perhaps they have shares in a private or family business that might have a high value at the time of their death.

Financial Accounts With Other Professionals: What if you’re not the only pro in a client’s life?

States With Estate Tax

Only 12 states (and the District of Columbia) possess estate tax, and five have an inheritance tax. One state boast both. (Way to go, Maryland.) If you live in one of these states, it's in your best interest to speak with an estate attorney or financial advisor to understand the scope of the taxes and what you can do to mitigate them if they apply to you (the inheritance one might, considering some have no exemption threshold). Here are the current rates:

Connecticut: The top estate tax rate is 12 percent and is capped at $12,920,000 million (Note: In 2023 this was set to match the federal rate...and it did.)

Hawaii: The top estate tax rate is 20 percent (exemption threshold: $5.49 million)

Illinois: The top estate tax rate is 16 percent (exemption threshold: $4 million)

Iowa: The top inheritance tax rate is 6 percent (no exemption threshold)

Kentucky: The top inheritance tax rate is 16 percent

Maine: The top estate tax rate is 12 percent (exemption threshold: $6.41 million)

Maryland: The top estate tax rate is 16 percent (exemption threshold: $5 million); The top inheritance tax rate is 10 percent (no exemption threshold)

Massachusetts: The top estate tax rate is 16 percent (exemption threshold: $2 million)

Minnesota: The top estate tax rate is 16 percent (exemption threshold: $2.7 million; this increases to $3 million in 2020)

New Jersey: The top inheritance tax rate is 16 percent (no exemption threshold)

New York: The top estate tax rate is 16 percent (exemption threshold: $6.58 million)

Oregon: The top estate tax rate is 16 percent (exemption threshold: $1 million)

Pennsylvania: The top inheritance tax rate is 15 percent (no exemption threshold)

Rhode Island: The top estate tax rate is 16 percent (exemption threshold: $1,733,264)

Vermont: The top estate tax rate is 16 percent (exemption threshold: $5 million)

Washington: The top estate tax rate is 20 percent (exemption threshold: $2.193 million)

Washington DC (District of Columbia): The top estate tax rate is 20 percent (exemption threshold: $4,528,800)

What Protection Do Your Clients Have?

If you practice in any of the states listed above you know how to help clients manage their estate so their heirs can get the most out of their inheritance. But how do you get the full picture? Do you ask about assets you’re not managing? For example: Do you know if a client has a Life Insurance policy and how much it’s worth? Do you know where these assets will go after a client passes, and do you want to continue managing them for the next generation?

Yes, we have a lot of questions — by our count we asked about 15 in this article alone. Luckily, Everplans also have solutions. Part of our mission is to help people organize and account for every possible asset.

Even if a client is nowhere near an estate tax threshold, it doesn’t hurt for them to get a handle on the totality of their estate and make sure they get a plan in place. They should think of of it like a routine doctor’s appointment. It’s worth the effort if only for peace of mind.